Government admits plans in place for Carillion collapse

The government has made contingency plans for the collapse of Carillion, the UK’s second largest construction company and a key provider of public services.

The troubled contractor – which has 20,000 UK staff and is a key supplier to the government, including a contract for work on the HS2 rail link – was holding crunch talks with its creditors on Wednesday to try to persuade them to back a rescue plan.

The company ran into financial difficulties last year after issuing three profit warnings in five months and writing down more than £1bn from the value of contracts.

It has debts of about £1bn and a £600m pension deficit, but a stock market value of just £100m after its shares collapsed 90%. Last week it emerged Carillion was being investigated by the Financial Conduct Authority over the “timeliness and content of announcements” made by the company between 7 December 2016 and 10 July 2017.

The proposed refinancing is expected to involve its lenders swapping their debt for Carillion shares, which would leave existing investors with little or nothing. As part of the package, its pension fund or the pension protection fund could end up as a major shareholder.

Lenders including HSBC, Barclays and Royal Bank of Scotland, which saw the details of the restructuring proposals for the first time at Wednesday’s meeting, were not expected to rush into making an immediate decision.

If no agreement can be reached, the company could be forced to seek emergency financial support from the government. This could take the form of an emergency loan, a repricing of some deals or the company handing back loss-making contracts.

The Labour MP Jon Trickett told parliament: “Despite being investigated by FSA and with debts of £1.5bn Carillion remains a major supplier in terms of government procurement. If they were to collapse it would risk massive damage to a range of public services.

“Does the government have a contingency plan for such an eventuality and what is the cost to the taxpayer?”

Oliver Dowden, cabinet office parliamentary secretary, replied: “We of course make contingency plans for all eventualities … Carillion is a major supplier to the government with a number of long-term contracts. We are committed to maintaining a healthy supply market and working closely with key suppliers.

“Carillion’s operational performance has continued to be positive, for example they advanced their work on Crossrail over the Christmas period.”

Earlier, a government spokesperson said: “The company has kept us informed of the steps it is taking to restructure the business. We remain supportive of their ongoing discussions with their stakeholders and await future updates on their progress.”

The company, which employs 10,000 people overseas, has been working on the revamp of Battersea power station, Liverpool Football Club’s new main stand, and the £335m Royal Liverpool University hospital.

It is the second largest supplier to Network Rail and maintains 50,000 homes for the Ministry of Defence, as well as running prisons.

It came close to breaching the terms on its borrowings last month, but its lenders agreed to a four-month extension until the end of April.

Before the meeting on Wednesday, a spokesperson for the company said: “Carillion is in constructive discussions with a broad range of stakeholders regarding its options to reduce net debt and recapitalise and/or restructure the group’s balance sheet.

“The group is currently finalising its business plan, which … will provide the basis for the agreement of a proposal to restore Carillion’s balance sheet.”

The company’s chief executive, Richard Howson, stepped down in July after the first profit warning. Its new boss, Andrew Davies, is this month due to take over from the interim chief executive, Keith Cochrane, three months earlier than planned.

Carillion’s shares rose 8% to 22.6p on Wednesday on hopes it would reach an agreement on the refinancing.